News from Cass Business School

Top US economist delivers annual Henry Thornton lecture

Professor Charles Calomiris voices fears over US inflationary surge

One of the world's leading economists, Professor Charles Calomiris, has warned US inflation could be set to soar unless the Federal Reserve learns crucial lessons from the Great Depression.

During the 1930s Depression, Fed officials wrongly believed high bank reserves were indicative of easy credit, and consequently failed to loosen monetary policy, resulting in the collapse of money and credit.

Speaking to a packed audience at Cass on February 23 at the annual Henry Thornton lecture, Professor Calomiris said the experience was a warning from history as the economy emerges from recession and US banks prepare to shed almost $1 trillion in excess reserves.

He said: "Banks are likely to reduce their liquidity demand dramatically once crisis fears have passed and central banks may be slow to respond to that reduced demand for reserves.

"The failure to understand the microeconomics of the connections between banks' conditions and their demand for liquid assets underlay policy errors by the Fed in the 1930s. Today, as then, if central banks don't understand what drives banks' demand for liquidity, they will make major monetary policy errors, this time leading to severe inflation.

"If the Fed fails to take those lessons into account, it could be caught severely behind the curve, causing excessive expansion of money and credit in 2011-2012, and a severe surge in inflation."

More than 100 academics, students and City professionals attended the lecture, which was titled Monetary Policy and the Behaviour of Banks: Lessons from the 1930s for the 2010s.

The Henry Thornton lecture was first started in 1979 to raise awareness among finance students of the work of the 19th century economist, renowned for his insights into British monetary policy during the Napoleonic era.

Professor Calomiris is Henry Kaufman Professor of Financial Institutions at the Columbia University Graduate School of Business and a Professor at Columbia's School of International and Public Affairs. His research spans several areas, including banking, corporate finance, financial history, and monetary economics.

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